NEW YORK (REUTERS) - The ripple effect from the downfall of Archegos Capital could cost global banks more than US$6 billion (S$8.1 billion), sources familiar with trades involving the US investment firm said, as regulators and investors fear the episode could reverberate more widely.
Japan's Nomura and Credit Suisse of Switzerland warned of major losses from lending to Archegos for equity derivatives trades, triggering a worldwide sell-off in banking stocks.
Morgan Stanley shares fell 2.6 per cent and Goldman Sachs Group dropped 1.7 per cent on Monday (March 29). Nomura shares closed down 16.3 per cent, a record one-day drop, while Credit Suisse shares tumbled 14 per cent, their biggest fall in a year. Deutsche Bank dropped 5 per cent and UBS was off 3.8 per cent.
Losses at Archegos Capital Management, a family office run by former Tiger Asia manager Bill Hwang, sparked a fire sale of stocks, including ViacomCBS and Discovery, on Friday, a source familiar with the matter said.
"This is a challenging time for the family office of Archegos Capital Management, our partners and employees," company spokesman Karen Kessler said in a statement. "All plans are being discussed as Mr Hwang and the team determine the best path forward."
Archegos was unable to meet banks' calls for more collateral to secure equity swap trades they had partly financed. After those positions fell sharply in value, lenders sold big blocks of securities to recoup what they were owed, the sources said.
"When you have people making certain bets based on what has outperformed in the past and the tide turns, they get burned. The question is how much leverage they used," said Mr Richard Bernstein, chief executive of Richard Bernstein Advisors.
The problems started last week when a disappointing stock sale by media giant ViacomCBS triggered devastating bank margin calls for Archegos, three sources familiar with the matter said on Monday.
Shares in ViacomCBS fell 23 per cent last Wednesday after the media company sold shares at a price which diluted its value. While stocks typically decline after share sales, ViacomCBS was also hurt by analyst downgrades concerned that its stock had become over-valued.
ViacomCBS' shares extended their declines last Thursday to be down 30 per cent from the previous Monday's close, setting off alarm bells at Archegos' prime brokers and prompting them to offload stock in all of Archegos' investments.
Goldman and Morgan Stanley were quick to offload shares on Friday, averting a material financial impact, sources familiar with the trades said.
Deutsche Bank said it had significantly de-risked its Archegos exposure without incurring any losses and was managing down its "immaterial remaining client positions," on which it did not expect to incur a loss.
However, other banks faced more serious repercussions.
Nomura, Japan's largest investment bank, warned of a possible US$2 billion loss, while Credit Suisse said a default on margin calls by a US-based fund could be "highly significant and material" to its first-quarter results. The banks did not identify the fund.
Credit Suisse's losses were likely to be at least US$1 billion, two sources said. The losses could reach US$4 billion, a figure, one source said. Credit Suisse declined to comment on loss estimates.
Regulators watching closely
Investors questioned if the full impact of Archegos' problem had been realised.
Market observers noted that only in February, hedge funds took major losses on short positions during the run-up in GameStop stock. Hedge fund deleveraging also contributed towards turmoil in the Treasuries market in March.
In the case of Archegos, the opaque and complex nature of its derivative trades, lightly regulated structure as a family office and high leverage - fuelled by historically low interest rates - prompted concern about potential systemic risk.
Regulators in the United States, UK, Switzerland and Japan said they were closely monitoring developments.
Archegos bought derivatives known as total return swaps, which allow investors to bet on stock price moves without owning the underlying securities, according to one source familiar with the trades. The fund posts collateral against the securities rather than buying them outright with cash.
Archegos' positions were highly leveraged. The firm had assets of around US$10 billion but held positions worth more than US$50 billion, according to the source who declined to be identified.
Mr Thomas Hayes, chairman of Great Hill Capital in New York, said Mr Hwang was known to run "a very concentrated, highly leveraged book."
The underlying shares were held by Archegos' prime brokers, which lent it money and structured and processed its trades. They included Goldman Sachs, Morgan Stanley, Deutsche Bank, Credit Suisse and Nomura.
Unwinding the positions led banks to sell large blocks of stock. Shares of ViacomCBS and Discovery each tumbled around 27 per cent last Friday, while US-listed shares of China-based Baidu and Tencent Music plunged as much as 33.5 per cent and 48.5 per cent last week.
Other stocks caught up in Archegos-related liquidations included Baidu, Tencent Music Entertainment Group, Vipshop Holdings, Farfetch, iQIYI and GSX Techedu.
Mr Hwang, who ran Tiger Asia from 2001 to 2012, renamed the hedge fund Archegos Capital and converted it to a family office, according to a page capture of the fund's website. Family offices act as private wealth managers and have lower disclosure requirements than other investment companies.
Hedge fund managers said they wondered why Mr Hwang, whom several described as a "smart guy", had made such big bets on ViacomCBS and Discovery, given the large wagers against the companies. The pair are not seen as high-growth plays, in contrast to other media stocks that have outperformed during the Covid-19 pandemic, the sources said.
Mr Hwang and his firm in 2012 paid US$44 million to settle Securities and Exchange Commission insider trading charges.